Canada gets a variety of tax cuts

Canadian coinsThe Canadian government released a mini-budget this past week that featured serious tax cuts. The GST goes down another point to 5% and the lowest bracket of personal tax is lowered back down to 15%. Corporate taxes continued their downward trajectory.

The CICA focused first on the reduction to corporate taxes:

“The government’s commitment to reduce the general corporate tax to a rate of 15% by 2012 is a positive step toward making Canadian companies more competitive,” said Kevin Dancey, FCA, President and CEO of the CICA.

Their media release about the announcement actually doesn’t even mention the GST or personal tax. That’s a little strange. I hope they’re just working on something really special and it’s taking longer than expected, because they would be remiss to miss out on commenting on these topics as well.

Clearly we as a profession should have something official to say about personal and consumption taxes. I know I do, as an individual member.

The Basic Personal tax credit amount was raised to $9,600 in 2007 and is scheduled to rise further to $10,100 in 2009. This is a positive step and smart policy, as a strong argument can be made to increase the limit to the poverty line. Any increase here is progressive and ought to be well received.

The cut to the GST from 6 to 5% as of January 1, 2008 is essentially regressive and rewards increased consumption. Shifting the savings here to the Basic Personal credit or lowering the general rate on income tax would have been better and greener.

Canada is riding high on a wave of prosperity, the loonie has reached levels not seen since before the 20th century, and unemployment is reaching all-time lows. It is only fitting that the Federal government return some of its surplus to Canadians.


8 quick facts about the principal residence exemption

Continuing the series of “quick facts” posts (see prior ones about the capital gains exemption and the new financial instruments standards), today is all about the principal residence exemption in Canada.

  1. Any residence may be designated a principal residence as long as you “ordinarily inhabit” the home. Ordinary inhabitation includes seasonal living such as your cottage and mobile homes such as a trailer or even a boat, as long as you lived on it!
  2. The designation of principal residence occurs in the year you dispose of it, and of course only one residence can be designated as principal for each specific year of ownership.
  3. The capital gain, if it cannot be entirely exempted, is prorated for the number of years you owned it and have designated it your principal residence over the total number of years you owned it.
  4. Deciding which residence to designate as principal depends on the capital gains on all owned residences on a per year basis, and then allocating each year in the optimal way to minimize the recognized gain.
  5. Starting in 1982, married couples who own more than one residence can only designate one family principal residence, called the “family unit” in the Tax Act.
  6. You can even designate foreign-owned homes as principal, but could incur foreign taxes upon sale. Naturally, the exemption applies only to your Canadian tax liability!
  7. If you rent out a home and decide to begin living in it, this “change in use” results in a deemed disposition and could result in a gain. An election exists to defer recognizing this gain until you ultimately sell the home.
  8. Conversely, if you live in a home and then begin renting it, you can still designate it as your principal residence for a number of years beyond that point. The exact number of years will depend on your specific details.

So to sum up the key points: Only one principal residence each year for the family unit, optimal tax planning requires estimating or calculating the gain per year for each residence owned, and a change in use has special rules that could result in a gain.

This is a very basic look at a complex section of the Tax Act. As with any general tax discussion, your personal situation is unique and requires the expertise of a Chartered Accountant. If you need a CA, please contact me and I will be happy to help you find one in your area!


My busy season has begun in earnest

Busy season is upon me and I’m up to my eyeballs in work. It’s Friday night but I’m relaxing at home, trying to chill out and prepare for a full day at the office tomorrow. Got out early tonight, at a mere 6:30pm!

Needless to say it’s affecting my blogging frequency. And hearing about lunch time outdoors ice skating at Nathan Phillips Square isn’t helping dull the roar of airplanes as they land a kilometre away. I’ve spent the past week at an office pretty much at the beginning of the the landing strip at Canada’s busiest airport.

One of the things I’ve learned since beginning this blog nearly 1 year ago is that everyone has busy season at a different time. I just assumed it was January through April for everyone! I figured, many companies have calendar year ends, hence audit season heats up, and income taxes are due in Canada by April 30 (and US taxes due by the 15th that month), so tax season compounds the frenzy.

Anyway, the schedule is booked solid for me through the end of May, but come June I’ll be jetting off somewhere hot and beachy. Until that week (or two), I’ll keep my head down and power through. (Props if you know where that phrase is from.)


Incorporate or not: It’s the investment

A small business usually starts out as a sole proprietorship, owned and operated by the founder personally and reporting business income on their annual personal tax return.

But as the business grows, the question of incorporation will always arise, and there are several factors to consider when this happens.

The most important single factor, in my opinion, is the tax savings that can be achieved through the corporate structure. Income earned in the corporation is taxed at a relatively low rate (20%ish) for small businesses (in Canada at least) and is then taxed when it is paid to shareholders as dividends.

Unincorporated business income is taxed at the earner’s highest marginal rate, which, in Canada, is 46%(ish).

The conclusion is that income that will be reinvested in the business (and thus, not paid out as dividends) will be taxed at a lower rate and allow the business to grow much faster than if it remained unincorporated.

If losses are expected, the owner is better off unincorporated, because those losses will flow through to his/her personal return and can be used to offset other sources of income. Losses in a corporation can only be used against income earned in that corporation.

Other advantages:

  • Separating business and personal income
  • Controlling the timing of business (dividend) income
  • Limited liability of the corporation